Snowball City – Loyal3 Dividends

For those who don’t know, Loyal3 is a newer brokerage service offering investors the chance to purchase stocks commission free with as little as $10 per share, using cash, linked checking/savings accounts, or credit cards. For savvy investors, this has presented an opportunity to juice returns by +1% or more as they arbitrage the stocks for those rewards. As an equity investor, being able to minimize trading costs is imperative, so back in January I started an account with Loyal3 and began my own no-cost dividend growth portfolio. Not only does Loyal3 eliminate commissions, they provide the ability to selectively reinvest dividends, a tremendous benefit not found in too many brokerages.

Receiving Dividends In Your Loyal3 account

As I addressed in my inaugural post about Loyal3 earlier this year, there are quite a few well know dividend growth stocks with years of consecutive dividend increases. Below you will find a copy of the chart included in that post, showing how many recognizable names are available which are a part of the Champions, Contenders, and Challengers (CCC) list put together by David Fish.

In addition the chart above, there are several other stocks that are close to joining the CCC list and are available on Loyal3. Those stocks are in the chart below:

Since we invest in dividend growth stocks for the express purpose of building a growing stream of passive income, being able to convert those earnings into new positions is what accelerates the growth we desire. Much like any brokerage, Loyal3 pays out dividends for each position held on the ex-dividend date (dividends actually paid on the payment date, not the ex-dividend date, which is the date of record in which all shareholders become eligible to receive the next dividend payment). With the ability to invest in fractional shares due to batch trading, dividends are paid in a prorated manner rounded to the nearest penny, reflecting the actual payout of your whole shares and fractional holdings.

For example, through the first three months of the year I was able to accumulate a portfolio of four positions (KO, MCD, TGT, and UL). Of those four positions, three of them were acquired prior to the ex-dividend date for first quarter dividend payments. Below is a snapshot of those dividends hitting my account in late March and early April.

Click for larger image

Looking at each dividend, you can see how each amount was calculated and paid:

As you can see, both KO and MCD were rounded up to the nearest penny and TGT was rounded down. Ultimately, between these three payments, I ended up with a total of $3.90 of cash in my Loyal3 account ready to be reinvested into my portfolio.

Loyal3 Dividend Reinvestment – How It Works

Since Loyal3 does not allow investors to DRIP their dividends, investors have two options when it comes to the reinvestment of their dividends. Which option an investor takes ultimately comes down to timing and the amount of dividends received. Option one is the select reinvestment of available cash in your account generated by dividends. Option two combines your available cash with a purchase from a linked account, be it a credit card, debit card, or cash withdrawal.

So which option to take? When you first start out and haven’t built up an account large enough to generate $10 of dividends in a reasonably short time, you will likely take option two because Loyal3 forces any and all available cash to be utilized prior to funding from an outside source. In order for option one to make sense, your Loyal3 account must be in a position where your holdings generate $10 or more dollars of dividends in a short period of time. While my portfolio page isn’t current (yet) as I catch up on posts, my current holdings will generate approximately $25 of dividends within a four-week period. Depending on when I initiate my monthly investments, I will alternate between option one and two.

Option two feels a bit unusual at first, given that Loyal3 forces you to use your available cash as you make an investment. If you are funding your purchases through a credit card, debit card, or cash withdrawals from a linked checking account, the dividends available in your account will be combined with your next purchase, reducing the amount pulled from the external funding source. This was the scenario when I made the first of my purchase transactions in April as highlighted below.

As you can see, my credit card was charged $96.10, with the balance of the $100 purchase coming from the $3.90 in dividends I earned previously. (Note: This was back before Loyal3 limited credit card transactions to $10, $25, or $50) At the end of the day, it is pretty simple to reinvest your dividends, regardless of which path you choose. Time to let those dividends get right back out there and start snowballing!

I am hoping to receive around $80 of dividends in my Loyal3 account during 2014. If those dividends are reinvested at a 3.00% yield, they will generate an additional $2.40 of dividends next year, and will continue to compound each quarter as they get reinvested. While this doesn’t seem like much, with my added capital and continued reinvestment, my Loyal3 portfolio will start rolling downhill on its own in short fashion.

Enjoying dividends in your Loyal3 account? How have you been reinvesting your dividends, and what success have you had in building a snowball making machine in a no-cost environment?

Comments

I just started a Loyal3 account earlier this month and I really like the no-fee. I’m not concerned with the reinvestment process because there’s a lot more positives than that. I didn’t realize that Loyal3 pays the dividend on the ex-div date. That’s a big advantage since you can get that capital invested even quicker. Now we just need a few more companies added to their list.

Loyal3 does not pay on the ex-dividend date. Let me review the post and see if my wording is misleading. My post is primarily a discussion of the logistics of dividend reinvestment within Loyal3, just one of the many benefits of having an account there.

It never sounds like much in the beginning but a snowball isn’t as impressive when it first starts rolling down a hill either. As you mention, time and compounding will work their magic and soon you’ll be making $80 a month in dividends instead of a year and one day $80 a day too. The key is to simply start and keep feeding the beast. Thanks for sharing your Loyal3 experience and now, no one has an excuse to not invest.

I completely agree DivHut, there is no reason given discount brokers, and free options like Loyal3, that people should have no excuse to start investing, even if it feels like pocket change. Thanks for stopping by!

The nice advantage if you invest in multiple stocks is that the 10,25,or 50 limit on credit cards is per stock purchase. I’ve been “buying” $10 in 6 stocks every month, and it’s 6 separate charges on my rewards credit card.
I am really enjoying loyal 3 though!

I agree! I have been making multiple purchases each month since January and have built my account into something that should begin to start turning over on itself in the next year or so as the dividends grow in size.

W2R,
Nice explanation of how Loyal3 handles dividends. I was a little confused the first time a CC charge was less than $50, because I had cash in the account. Makes sense though and I like the way it works. It would be nice to have a traditional reinvestment option for all stocks. Maybe if enough of us clamor for it!
-RBD

Haha I had the same confusion RBD! Fortunately, before I processed anything I was able to take the screen grabs you see above. While a traditional reinvestment would be a great option, the primary benefit of a DRIP is the lack of “lost time” due to the immediate reinvestment of dividends. Given the ability to either combine your dividends with new purchases or reinvest once you hit the $10 mark, I think it is a reasonable option given the no-cost nature of the account to begin with.

I’ve seen a lot of confusion over the web here lately on how Loyal3 handles their dividends. I’ve been using Loyal3 since January as well and really like it. Since my portfolio is still relatively small, I just use option #2 for reinvesting dividends which is all right with me as I don’t have a set in stone amount I want to invest there each month. Its just whatever is available if I don’t have enough to justify making a purchase with a commission through my regular broker but still want to buy some stock.

For those that really want to always make certain dollar amount buys each month with all new capital it might be a little inconvenient but I think the pro’s of the service far outweigh the cons. Probably the easiest way to get started with DGI right now with their stock selection and simple to use platform.

Part of that confusion was why I wrote the post. Personally, option two has been where I’ve found myself as my portfolio builds. This upcoming quarter’s payments will likely be the first time where I take option one, given the growth of my portfolio. As you’ve mentioned, it is annoying when trying to invest a consistent amount each month, but my solution has been to round up to the nearest $10 mark. This has worked out quite well for me thus far.

I couldn’t agree with you any more about Loyal3 being one of the best options for a beginner investor looking to get into DGI. Combined with the no-cost functionality, anyone with just $10-50-100 per month available for investing can begin to build their own snowball.

Loyal3 handles taxes just like any other brokerage firm. You will receive a 1099 (either DIV or Consolidated) that covers your dividends earned, as well as any gains and losses that result from the sales of any positions. Hope this answers your question!

Just don’t sell your positions if you don’t have to! Remember, you’ll only pay taxes on positions you sell (if at a gain), so why not hold them and let them continue to grow? We always assume we “win” if we buy and sell. It’s just not the case. The American way is to pump and dump on stocks, buy low, sell high and so on…they don’t emphasize how true wealth is gained – by minimizing taxes, investing in tried and true dividend stocks and holding them forever. Not sexy, but my first million was made this way and after I hit it, I lived so long in a frugal lifestyle, I kept saving and continue to live well below my means. Do the same I beg you! Giggle when you see 16 year olds in daddy’s new car knowing that that money, slowly invested over time, could have set them up for life. Invest slow and steady, watch it grow, relax and take a deep breath when markets have bumps and add money when others are running for the hills.

Thanks for the comments Richie, and I agree with your sentiments. Selling is generally not an option when I invest, so allowing a portfolio to grow and build on itself is important. Every dollar spent today is several dollars lost down the road. Something I try to balance as I live my life.

Your post has come at a most opportune time for me. I had never heard of Loyal3. When I retired early I went to Mutual/Index fund investing and have been looking at buying individual company stocks again. I will definitely look into Loyal3. Thanks for the great info.
Prost!

I hope you can find some success with your change in investment strategy, however I would caution that individual stock selection is not a fit for everyone. Identify your risk tolerance, understand the basics of your investment strategy for both bull and bear markets, and adhere to it. Stripping emotions out of the process is a must in the individual selection arena. I’m glad that Loyal3 might be a place where you can start investing and get your feet wet. I am loving my experience with them thus far.

And congratulations on your early retirement and quest to stay actively investing.

Thanks for the explanation of how Loyal3 handles dividends. That’s interesting. I still haven’t opened an account. I’ve stayed away just for the simplicity of keeping everything in one brokerage account. But I think I should just do this, since the no-fee structure is very alluring. Best wishes!

W2R, I’m really interested in opening a Loyal3 account, and will likely do so within the next few days to start an accumulation portfolio of regular small investments in some bottom drawer set and forget companies. The one concern that I had was how the investments are actually help (ie in a custodial account). If Loyal3 goes out of business, do I need to line up alongside other creditors to have a shot at reclaiming my holdings? A scenario we don’t want to consider, but I’m curious as to what the resolution would be. Or does this work like any other broker account?

My understanding based on the FAQs on their site is that should Loyal3 go out of business, all customer’s assets will be transferred to the broker-dealer of their choice/or a default broker, as with any other broker we all invest through traditioally. From a “going concern” standpoint, I don’t think investors have anything to worry about. Since you are not investing in a fund, but instead, are investing in individual securities, your assets are protected by the SPIC insurance from fraud and other issues.

Hi W2R,
I’ve been wanting to experiment on opening a loyal3 account, who doesn’t want a free trade then the use of credit cards reward. I have a question tho, do you know if they have an option to transfer account to a different brokerage company?

Ogie DG, the short answer is yes, you can transfer the account to another brokerage. However, based on my understanding, you can only complete the transfer if you close the account. Another way of saying that is if you transfer the assets, you will be made to close your account. I would look into it further prior to transferring any assets.

Just way too costly of a program to keep active for the long haul. I’d imagine that there was a budgeted spend for marketing purposes and once that was run dry, they ended the program. Customer acquisition, while still important, can be achieved more through word-of-mouth and other sources much cheaper without the credit card hook.

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I am not an investing professional, and as such, any investments or financial topics discussed on this page are my opinions only, and should not be considered financial advice or recommendations to purchase or sell securities, or any other investments.